Yen Strengthens Against Dollar as Inflation Supports BOJ Rate Hike Bets

The yen edged higher against the dollar on Friday, with USD/JPY trading around 158.87. The pair had rebounded from the 158.00 level on Thursday before drifting lower on Friday. Growing market expectations for a near-term rate hike by the Bank of Japan (BOJ) emerged as the key driver underpinning the yen.

**Inflation Data Bolsters Case for Rate Hike**

Japan's national Consumer Price Index (CPI) inflation report is due shortly, with recent data consistently exceeding the central bank's 2% target. According to Reuters, overnight index swaps suggest the market prices in roughly an 80% probability of a BOJ rate hike as early as September. This expectation stems from recent hawkish comments by BOJ policymakers and stubbornly high inflation readings. However, some analysts argue that current Japanese inflation is cost-push in nature, meaning a rate hike may struggle to fundamentally curb price momentum and could raise financing costs for small and medium-sized enterprises.

**Yen's Weakness Far from Reversed**

Despite the short-term support from rate hike expectations, the fundamental backdrop of the yen's long-term weakness remains unchanged. The wide interest rate differential between the U.S. and Japan keeps carry trades—borrowing yen to buy dollar-denominated assets—highly profitable, sustaining persistent selling pressure on the yen from global carry traders. Keio University professor Sayuri Shirai noted that unless Japan sees substantial improvements in domestic demand or productivity, USD/JPY is likely to remain around 160. Additionally, domestic fiscal concerns, such as Prime Minister Takaichi Sanae's proposed tax cuts lacking alternative revenue sources, could further weigh on the yen.

**Technical Outlook Stays Bearish**

On the technical charts, USD/JPY retains a bearish bias in the near term. The pair is trading below the 100-day simple moving average and the 20-day middle Bollinger Band, while the Relative Strength Index (RSI) sits at 44.46 in neutral-to-weak territory, suggesting fading upside momentum. On the upside, key resistance is seen near 160.00; on the downside, the lower Bollinger Band around 155.40 serves as important support—a break below that level would reinforce the current pullback tone.